How to Avoid Capital Gains Tax on Second Homes

Selling your second home or buy-to-let property means that you’ll have to pay capital gains tax on the profits you make. 

If you’re wondering what a capital gains tax is, how it works, and how to avoid capital gains tax on second homes, read on.

What Is Capital Gains Tax?

Capital gains tax (CGT) is a tax levied on the sale of an investment or a property. The most common capital gains are paid on a second home and it’s paid to HMRC (Her Majesty’s Revenue and Customs).

You’ll have to pay capital gains tax regardless of how you make the profit and including if you gift the property or exchange it for another asset.

How Does Capital Gains Tax Work?

Capital gains tax is paid on the profit that you make when selling a property or asset.

For example, if you bought the property for £300,000, made improvements, and sold it for £500,000 for it, you’ll pay CGT on the £200,0000 you made in profit.

When Do You Have To Pay Capital Gains Tax On A Property?

You always pay capital gains tax on a second property or first if you make a profit when you sell:

• buy-to-let properties
• business premises
• land
• inherited property

The rules for paying capital gains on the second property and main residence are different. You might be able to completely avoid paying CGT on a primary residence if you meet certain criteria.

You pay CGT on second homes when you:

• Sell (regardless of whether you bought it or inherited it)
• Gift (if the property increased in value)
• Transfer part of it to someone else.

How Is Capital Gains Tax Calculated?

The amount of CGT on second homes you’ll have to pay depends on:

• The profit you made from the same.
• Your tax bracket.
• The costs of any improvements made to the home.

Currently, basic rate taxpayers pay 18%, and higher rate taxpayers 28% in capital gains taxes.

For example, if you bought your second home for £100,000 and you sold it for £300,000, you would owe CGT on the £200,000 profit, which is £36,000 for basic rate taxpayers (at 18%) and £56,000 for higher rate taxpayers (at 28%).

The good news is you might be able to reduce that amount and the capital gains tax for the second home with tax allowances. 

Annual Capital Gains Tax allowance 

For the 2023-24 tax year, UK residents get up to £6,000 of tax-free capital gains.

This means that if the property’s value hasn’t increased by more than that amount or you have made less profit than that, then you won’t owe HMRC anything in capital gains tax. 

Ways To Reduce Or Avoid Capital Gains Tax On Second Homes

Depending on your circumstances, you could reduce the capital gains tax you owe to HMRC when selling a second property and might even be able to avoid paying a tax altogether.

How To Reduce Capital Gains on a Second Home?

When calculating how much you owe in capital gains on a second home, there are a few things you should consider that can bring down the amount you owe, including: 

• CGT annual allowance
• Stamp duty
• Solicitor and estate agent fees
• Surveying and valuation costs
• Costs linked to improvement work – e.g. an extension.

You can deduct all of these expenses and then calculate how much you owe in capital gains tax on the second property.

Using the above example, if you’ve paid £5,000, £5,000 in solicitor and estate agent fees, and you add the annual allowance of £6,000, your CGT will be calculated at £194,000.

That means you’ll need to pay £34,920 if you’re in a lower tax bracket and £54,320 if you’re in a higher tax bracket. 

How Can I Avoid Capital Gains Tax When Selling a Second Home?

There are two ways to completely avoid paying capital gains tax on a second home.

Change your place of residence

If you’re looking to avoid paying capital gains tax on a second property, then the easiest way to do that is to change your second residence to your primary residence. Under UK law, when a person owns two homes they can nominate one to be treated as the main residence. 

UK residents automatically get a tax break, known as Private Residence Relief, if they meet certain criteria when selling their main residence, but it doesn’t apply for CGT on second homes.

Sell it right away

If you inherit property and sell it right away, you might be able to get away without having to pay capital gains taxes because the property is unlikely to increase in value that would exceed your annual CGT allowance. 

The government does not require inheritors to pay CGT for simply inheriting the property– only when they sell it and make a profit. 

If you make a profit when selling an inherited residence and you can offset the cost with your tax allowance and other expenses, you’ll have to pay capital gains for a second home.

What Is Private Residence Relief?

Private residence relief (PRR) is a capital gains tax relief that helps homeowners completely avoid or reduce the capital gains tax on property profits, including capital gains tax when selling a second home.

Main residence

PRR can only help you avoid CGT when you’re selling your primary residence, but only if you meet all of the following criteria: 

• You have one home where you’ve lived for the entire time you owned it.
• You have not let part of it out.
• You have not used it exclusively for business purposes.
• The property isn’t over 5,000 square metres.
• You didn’t buy it to sell it.

Second home

When selling a second home, you can get relief based on the financial gain and the amount of time you’ve lived in the property. You will always get relief for the last nine months you owned the home and the years you lived in it. 

How Does Private Residence Relief Work on CGT on Second Homes? 

If you buy a property that’s not your primary residence for £190,000 and sell it later for £240,000, you make a taxable gain of £50,000.

If you’ve lived in it for two years before you started to let it out (or simply treated it as a holiday home), you will get relief on the time you lived there, plus nine months after you moved out. 

That means you’ll get Private Residence Relief for 33 months or and skip on capital gains tax on the second home on 46% of the gain, which is £23,000. You will still have to pay capital gains on a second property for the remaining 54% of the gain (£27,000). 

How Do I Pay Capital Gains Tax On My Second Property?

You will need to report the amount you owe in ​​tax on the sale of a second home to HMRC after you work out how much you need to pay. 

You can pay your capital gains tax as soon as HMRC sends you a payment reference number by: 

• Bacs
• Cheque
• Faster Payments
• CHAPS

When are you supposed to pay capital gains tax in the UK?

You must report any capital gains or amounts you owe by a specific deadline:

• If you have completed the sale of a residential property in the UK on or after 27 October 2021, you need to report and pay within 60 days.
• If you have completed the sale of a residential property in the UK between 6 April 2020 and 26 October 2021, you need to report and pay within 30 days.
• If you have other gains to report and you file a Self Assessment tax return, you must pay in the tax year after a sale or disposal of an asset. If you meet certain criteria, you could use the ‘real time’ Capital Gains Tax service to report your gains by December 31 of the tax year after the sale.

For example, if you’ve made a gain between 6 April 2021 and 5 April 2022, you’ll need to pay your capital gains tax by 31 January 2023.

Is there a penalty for not paying capital gains tax?

If you’re late on your payment, the HMRC will charge you interest, and you’ll have to pay a penalty. The late payment penalty is 5% of the outstanding tax on the sale of a second home.

Bottom Line

Selling property or assets will likely make you liable for capital gains tax. There are some ways that you can avoid it if you’re selling your primary residence, but if you’re selling your second home, you could potentially only reduce the amount you owe with your tax allowance and Private Residence Relief, among other things.